How to select mutual funds India?
You have been always wondering how to select mutual funds in India for your SIP or lump sum investment?
We know there aremany options available in the market today which promise excellent returns from a mutual fund in the long term. But do all mutual funds give excellent returns? The answer is NO. a lot of mutual funds underperform the market and end up giving fewer returns compared to most of the funds.
It becomes a challenge for an investor to choose a mutual fund that will give a decent return to fulfill the needs of the investor. So what should someone do? we have tried to explain the top 5 factors that you should keep in mind while you select a mutual fund for your investment via SIP or a lump sum.
These are not the only 5 but these 5 factors play a huge role in deciding which mutual fund you select for your investments.
1. What is the Long Term Record of the Mutual fund?
For any Mutual fund, track its past 10 years performance record. It is not necessary that the fund should be performing excellent and be at the top every year. Instead, we should check whether the fund has remained in the top 20% in its category for each year at least in the past 10 years.
A good fund cannot perform excellently well every year, but it should remain above average in all the years. This will ensure that the fund is not taking the extra risk to become a leading performer in any particular year. Thus it will not perform too bad if the market corrects itself.
The example below is from SBI equity fund where the fund has been underperforming compared to other funds in the 1yr, 2yr, 3yr period but it stands out in the top 10 in the 5yr and 10yr category.
2. Who is the Fund Manager for the mutual fund?
It may happen that a fund has performed above average every year of the past 10 years as per the 1st criteria discussed. Then should you immediately purchase that fund? Is selecting a fund that much easy? Definitely not!
If a fund has a constant track record in the past 10 or 15 years, then whether we should invest in that fund depend greatly on the fund manager. The past performance does not have any significance if the fund manager has changed recently. We should always check whether the same person is managing the fund who has given consistent returns in the past 10-15 years. This is because a fund is not good or bad, instead, a fund manager is good or bad.
How do we determine whether a fund manager is good or bad? First, the track record of the fund should be consistently good in all those years in which he has managed it. Second, if a fund manager manages 5 funds and if out of 5 only 1 scheme has performed well and rest 4 have fared badly, I will not consider that fund manager to be good.
It may happen that if you are doing 5 things, you perform well in one due to sheer luck. If 3 or 4 out of 5 do well, I will consider that fund manager to be good and I can trust that person for my investment.
3. What is the track record of the AUM for the Fund?
Now we see a fund’s track record is well, the fund manager is good, the same fund manager is managing the fund for past 7-10 years. The next thing we will focus is AUM i.e. Assets Under Management.
We must track how the AUM has changed in recent times. Has a lot of money in-flowed into the fund in the past 1 or 2 years? It may happen that initially when AUM was low, it was easier to find quality stocks. Now if suddenly a huge inflow of money happens in that fund, I will avoid that fund. During such times, the fund manager has to somehow invest that money as he cannot keep more than 35% of the money in cash. So he may be forced to buy not so good quality stocks. In such cases future performance will get affected.
4. What is the Risk vs Return Record for the fund?
We should not only monitor returns, we should also check risk vs return track record. That is because good returns can be generated by taking high risks. But that fund manager is best who can give high returns taking the lower risk. Generally, large-cap schemes have a lower risk than mid-cap or small-cap schemes. If a large-cap scheme has given 15% returns in the past 10 years and a small-cap scheme has given 16% returns during the same period; then for only 1% extra returns I will not prefer high-risk small cap funds.
5. What is the TER for the Fund?
TER (Total expense ratio) is the commission that the MF company makes when you invest in the fund. Please check what is the TER for the fund. is it too high? i.e. are you giving away too much as commission for the fund? Avoid the funds which have very high expense ratios.